Shares for your staff

Financial employee participation schemes allow employees to acquire a share in the company’s assets, either in the form of a bonus or by acquiring shares in the business. In the Netherlands, 17% of companies offer their personnel some type of employee participation. That is less than in other European countries, as a study (in Dutch) by the Utrecht University School of Economics reveals.

Types of participation

The most basic form of employee participation is a profit-sharing plan. Profit-sharing can be used by all types of businesses, big or small. There is no risk involved for the employees. 

Varieties of profit-sharing are bonuses or a SAR, a Stock or Shares Appreciation Right. This is a virtual share. Companies with an existing shares arrangement can give out SARs if they have no more shares available for their employees. These profit-sharing arrangements follow your company's stock price. Your employees receive a share in the company profits. 

An SAR will often cost you as an employer more than regular profit-sharing. The price of your shares is calculated annually. Your employee does not become the owner of the share. Some companies use the term secondary working conditions, rather than financial participation. 

In addition, there are the ‘genuine’ forms: regular shares, depository receipts for shares, shares without voting rights, and variants of these forms. These types are suitable for SMEs and bvs (private limited companies, besloten vennootschappen).  Your employee becomes a co-owner, but not an entrepreneur.

Benefits for business owners 

Employee participation has several benefits for you as a business owner. For instance, for your private equity, or if the business is transferred. 

Opportunities for small SMEs

Employee participation represents an addition to a company’s terms and conditions. SMEs providing such benefits to their workers tend to stand out. “Small organisations must compete with large ones when it comes to employee benefits, company culture, level of responsibility, and salary”, Pascale Nieuwland-Jansen argues. She is the managing director of Stichting Nederlands Participatie Instituut (SNPI). “Many people would like to be self-employed or work as independent contractors, but preferably also be part of a larger structure. If you make everyone in a small business a co-owner, you end up creating a very strong, small organisation, and will have more to offer workers than a company where the employee benefits consist of a salary only, and nothing else” she states. 

Business transfer

Another form of financial employee participation can take place during a business transfer. For example, there are one or two directors-majority shareholders in a business who are both looking to retire. It may be difficult for a small organisation to find a buyer, making it hard for a director-majority shareholder to leave the business. One option is for employees to take over the company over a period of 5 to 10 years. This offers small businesses some degree of continuity.

Boosting your equity capital

Financial participation can also help you boost the equity capital of your business. When you start an employee participation scheme, the company can issue new shares and have employees buy those shares. The proceeds from this sale are then added to the company’s assets. This makes you less dependent on banks and increases your cash flow. The business can then make additional investments or boost the capital position of the business. 

New scheme

The tax scheme for stock option rights has changed. A stock option right enables your employee to buy shares for a specific price during a set period of time. Since 1 January 2023, you as an employer can choose to pay payroll tax on stock options for your employees at a later date. Not only when you issue the stock options, but also when the option rights are converted into shares. Or when the shares can actually be traded. However, your employee may ask for taxation at the time of issue of the stock options. You then determine the fair market value at that time. Your employee must give you written notice of this choice.

Benefits for employees

Employee participation also provides a number of benefits for employees:

• employees are shown appreciation for their work; the business owner realises that people are the company’s most important assets and are the drivers of its success. Financial participation schemes reward them for their loyalty and hard work. The employer makes a conscious decision for the employees to collectively acquire shares in the company. Companies are not required to offer their employees a financial participation scheme.
• A second advantage is the opportunity for employees to accumulate wealth through share ownership. If your business remains successful, you can have your shares increase in value. If this does not happen, you can arrange to pay dividends once a year. 
• A third advantage for employees is that they have access to additional information about the business and the opportunity to take part in discussions. You involve them in your strategic planning.

Tax issues for your employees

If your employee owns less than 5% of the shares, they pay income tax on the share value in box 3 (savings and investments). The bv already levies dividend tax on the bruto dividends. The employee can deduct this dividend tax in their income tax return.  

Does your employee own more than 5% of the shares? Then they have an aanmerkelijk belang (substantial interest). The distributed profit on shares is taxed in box 2. Also in this case, the employee can deduct the dividend tax from their income.  

Risks 

Share ownership also comes with its share of risk. If the business is struggling financially, its shares may lose some of their value, which will affect both the business owner and employees with shares. Set out the terms of share ownership in writing. For example, what happens when an employee leaves the company or retires? Do the shares go to other employees, or do they return to you? 

Starting an employee participation scheme

Do you want to introduce financial participation? First, think carefully about your goal. Attracting and retaining people is key now, as talented staff is hard to find.

Ask yourself whether employee participation is compatible with your style of doing business. Remember that you must be willing to not only share company stock, but information as well. Is that something you are willing and able to do? Your employees will have access to all the financial data of your business and be familiar with the plans for the future. Also if you intend to shut the business down. If your answer to that question is ‘yes’, you should consider a stock option plan or certificates system.

Success factors 

Many engineering firms, consulting firms, and IT companies successfully use a system of financial employee participation (in Dutch). You will succeed if you:

• realise sufficient returns, because everyone contributes. 

• have a solid legal plan. 

• foster a culture centred on collaboration: being entrepreneurs together and sharing together. And if the business is in financial trouble, you need to decide together what to do. 

• have a clear-cut HR and communications policy.

• run your business transparently, allowing employees insight into your decision-making process. 

Mixed success

Not all organisations manage to successfully introduce a financial participation scheme. Some businesses take longer to create a culture of collaboration. There are also organisations whose financial performance deteriorates over time after people have invested a fair amount of money in the business. They will have no way of retrieving these funds. They do have the option to sell their shares, but it will be at a lower price. 

Enlisting help

Nieuwland says that being well-prepared is important: “Make a point of asking people for help. While setting up an employee participation scheme may seem easy, unless you are aware of the full spectrum of choices out there, you may make the wrong decision. You should see it as a change process or organisational model. It is not a tool you can integrate into your organisation just like that. It works more easily in businesses with flat organisational structures and self-management.”  

Future

Nieuwland expects employee participation in the form of stock option plans to keep becoming more common: “Mainly because qualified people are really hard to find. You will see, for example, that employees who are shareholders and mention this in their LinkedIn profile are not snapped up as quickly as employees who are not co-owners.”